Increased Scrutiny for <I>Cy Pres</I> Provisions in Class Action Settlements

While cy pres distributions are generally provided for in the settlement agreement, the court may order excess funds to be paid to a cy pres recipient. Thus, the cy pres doctrine typically is applied in one of three situations:

1. when the parties agree that if a fixed settlement fund exceeds the amount paid (because too few class members register as claimants), then the excess funds are to be used to make cy pres payments;
2. when the parties agree that the entirety of the settlement funds are to be paid pursuant to the cy pres doctrine; or
3. when the court decides that administering a settlement by paying class members directly would be too expensive or burdensome.

When cy pres payments are included by the parties in the settlement agreement, the parties may specify which charitable entities will receive the funds — or they may leave the specific charities to be decided by the court at a later time, although the latter choice may be becoming a risky practice.

Courts used to routinely approve cy pres provisions. Indeed, cy pres payments have several benefits:

• they create donations to worthy causes;
• they diminish the risk of objectors;
• they reduce potential notice and claims administration costs and may provide tax benefits for defendants;
• they increase contingent fee awards for plaintiffs; and
• they allow for easier administration of settlement payments for the court.

Despite the popularity of utilizing the cy pres doctrine and its benefits, courts are reviewing class-action settlement agreements that provide for cy pres payments with increased scrutiny, particularly in the percentage of funds distributed pursuant to the cy pres doctrine, and the nexus between the underlying action and the cy pres recipient.